Fannie Mae-No Politics (FNMA)

[kthomp19]

3% cap level means $180 billion equity. FnF currently have $45 billion, so $135 billion are missing to reach the required cap level.

It's worse than that. The 3% exit threshold is based on CET1 capital, which excludes the juniors, AOCI, and deferred tax assets.

Without the seniors, Fannie's CET1 capital was negative $6.934B at the end of 2020.
Without the seniors, Freddie's CET1 capital was negative $4.896B at the end of 2020.

(With the seniors those numbers are negative $127.770B and negative $77.544B respectively)

That means the shortfall isn't $135B, it's $192B ($180B threshold minus negative $12B of current CET1 capital). That does go down with retained earnings, but it would take 3 years to get down to the $135B you calculated and 10 years to disappear entirely. And that's only if Treasury agrees to cancel the seniors or convert them to commons; as things stand the seniors drag down CET1 capital by an additional $193B.

The missing capital must come from outside investors (capital raise), because converting the old commons (OTC) into new commons (regular) wouldn't bring a single Cent.

Correct. Converting the juniors to commons, on the other hand, does increase CET1 capital so it is a viable way to help close the gap. Not doing a conversion both guarantees dividends to the juniors and makes the capital raise $33B bigger; common shareholders who argue against a conversion rarely take this into account.

This would result in dilution by roughly factor 34 (= 135 / 4).

My calculations don't work that way, but I see where you got your numbers.

One way to estimate the post-raise common ownership by each group (new investors, converted juniors, existing commons, warrants, converted seniors) is to look at how much of the required capital each group contributes. Retained earnings and CET1 capital already on the books are attributable to the last three, capital contributed by the equity raise is attributable to the first one, and the juniors are worth $33B of CET1 capital once converted.

On this basis, the juniors will need to be offered at least 18% ($33B / $180B) to accept a conversion. If FnF achieve a $250B market cap later, that stake will be worth $45.8B, or around 138% of par.

$2.35 billion is 60% of current market cap. So it's like old commons dropping from now 2$ to $1.20$.

If warrants are NOT executed, it is like old commons advancing from 2$ to 6$.

If Treasury doesn't exercise the warrants, that's terrible news for the existing commons because it would mean Treasury either converts the seniors (crushing the existing commons to near-nothing) or sees the warrants as having so little value that they aren't worth exercising (two of the CBO's scenarios in this paper from last August value the warrants at $0.1B).